Government bonds are still a sound investment, according to UBS. The investment bank wrote in a Wednesday note that despite Fitch’s move to downgrade the United States’ long-term rating to AA+ from AAA , current macroeconomic conditions are well suited for government bonds. Fitch attributed the downgrade on Tuesday to an “erosion of governance,” referring to political standoffs around the debt limit, as well as growing debt levels. The firm expects government debt to reach 118.4% of gross domestic product by 2025. “All else being equal, the move might be expected to push yields higher on US government debt, as investors demand a greater risk premium,” wrote Solita Marcelli, chief investment officer, Americas, for UBS Global Wealth Management. “But based on historical experience and current economic conditions, we expect yields to fall, and we view US government bonds as most preferred.” US10Y US2Y YTD line U.S. 2 year and 10 year yields Bond yields move opposite to their prices. Treasury yields popped on Wednesday, with the 10-year spiking over 4.1% at one point. Marcelli added that declining inflation will also support bonds, while markets remain optimistic that the Federal Reserve could be near the end of its rate-hiking campaign. “Inflation in the US has shown clear signs of cooling, a beneficial development for fixed income,” Marcelli said. “The Federal Reserve’s favorite measure of underlying inflation—the core personal consumption expenditure index excluding food and energy—slowed to an annual 4.1% in June, down from 4.6% in May.” She noted that the added benefit of having U.S. Treasurys is that they offer the potential for capital appreciation if investors become concerned about slowing growth. In particular, Marcelli said the firm prefers five to 10-year maturities. — CNBC’s Michael Bloom contributed reporting.
